Tuesday 3 September 2013 20.32 EDT
First published on Tuesday 3 September 2013 20.32 EDT

Bad news for the Archbishop of Canterbury: competing Wonga out of existence, which is Justin Welby's declared ambition for credit unions, ain't going to be easy.

The payday lender's financial results for 2012 confirmed how far Wonga has come in six years. Post-tax profits rose 36% to £62.5m and four million loans totalling £1.2bn were advanced to more than one million customers. The company is on a roll.

How has it been done? Wonga's business model seems to have four key elements. First, the company rejects two-thirds of applicants as bad credit risks. Efficient assessment of credit risk kept default rates last year to 7.4% – a rate that would disgrace a mainstream lender but is easily tolerable for Wonga at its astronomical rates of interest. It is also why chief executive Errol Damelin can breezily offer to help Welby give credit unions a leg-up. Damelin, you can be sure, will not be offering to hand over the algorithms that are central to Wonga's system.

Second, Wonga is, one must admit, a slick operation that gives its customers what they want. Processing loans rapidly is not a trick mainstream banks have mastered. Whether you regard many of Wonga's customers as desperate or misguided, the company has clearly identified an appetite for instant loans.

Third, Wonga is an extraordinarily capital-efficient business. Damelin boasts that the company makes only £15 net profit per loan. That sounds low but the point to remember is that the company is turning over its capital several times each year. Thus the "same" £200 might earn £15 six or seven times in the space of 12 months. That is what produces financial statistics that leave mainstream lenders in the shade. Wonga's return on shareholders' equity is about 30% and after-tax profit margins are 20%.

The fourth characteristic is the one that – rightly – enrages Wonga's critics. It is the company's presentation of borrowing at high interest rates, even for a short period, as a fun-filled everyday activity undertaken by aspirational folk. The adverts are humorous and Damelin reports that his typical customers are "young, urban, digital, and with a very strong proportion of smartphone ownership".

There will, of course, sometimes be sensible economic reasons for some borrowers to take out a short-term loan at high interest rates – avoiding overdraft charges, for example. But, on Damelin's description of his customers as members of the "Facebook generation", most would be better off curtailing their spending or joining the world of mainstream finance.

More fool them, one might say. Well, yes, but society should also protect the interests of the victims of the growth of payday lending – the already over-indebted who are dragged deeper into trouble by becoming hooked on short-term loans. There is a clear case for placing caps on how much payday lenders can charge. A limit of 50%-60% rates of interest sounds reasonable to curb rollover lending.

Certainly somebody in the financial or government establishment should take an interest in the rise of easy-access payday lending. At the very least, Wonga and its ilk, via their cheery adverts, are undermining everything the new regulator says about the importance of financial education in avoiding the next crisis.